Guiding clients through the offshore voluntary disclosure program.

• Author: Freeman, Jason B.

Since 2009, the IRS has offered several formal offshore voluntary disclosure programs or initiatives. These programs have allowed qualifying taxpayers with previously undisclosed foreign accounts and assets to come forward and voluntarily disclose those accounts and assets in exchange for reduced penalty exposure and a promise that the IRS will not refer the taxpayers for criminal investigation. The Service announced in January that the current version of the program would remain open indefinitely.

In June 2014, the IRS announced several major changes to the Offshore Voluntary Disclosure Program (OVDP), including increasing the offshore penalty from 27.5% to 50% for certain accounts. At the same time, the IRS expanded its streamlined filing compliance procedures, which offer, an alternative (and generally less expensive) route to disclosure for those taxpayers willing and able to certify that their failure to report the foreign assets and pay any resulting tax was not willful.

As part of its June 2014 announcements, the IRS clarified that it now offers four general options for taxpayers to address their prior failures to comply with U.S. tax-and-information-reporting obligations for foreign assets:

* The OVDP;

* Streamlined filing compliance procedures;

* Delinquent Report of Foreign Bank and Financial Accounts (FBAR, FinCEN Form 114) submission procedures; and

* Delinquent international information return submission procedures.

This item provides a synopsis of the steps and procedures involved in initiating and completing a successful voluntary disclosure through the OVDP. While the other options and procedures available to a taxpayer with previously undisclosed foreign assets should be considered (depending on the taxpayer's circumstances), those initiatives' procedures are beyond the scope of this item.

Qualifying for the OVDP

The OVDP is available to taxpayers who truthfully, timely, and fully disclose to the IRS the existence of their previously undisclosed funds from legal sources held in foreign jurisdictions, and who otherwise cooperate with the IRS. This cooperation includes making good-faith arrangements to satisfy the tax, interest, and penalties determined to apply.

Timeliness is important in evaluating whether a taxpayer qualifies to make a disclosure through the OVDP. For example, under Internal Revenue Manual Section 9.5.11.9, paragraph 4.A, a disclosure is not timely if the IRS has already initiated a civil examination or criminal investigation of the taxpayer or has notified the taxpayer that it intends to begin an examination or investigation. A disclosure is also not timely if the IRS has already received information from a third party (e.g., informant, other governmental agency, or the media) alerting it to the...